How do paid day loans affect your credit score?
Pay day loans have become more popular than ever over the recent years. With 3 out of 4 people in the UK taking out some sort of short term loan. Pay day loans have also had a lot of bad press due to their very high interest rates, sometimes as high as 400%! Many people are also wary of payday loans because of their effect on your credit score. Refused Car Finance are a leading car finance provide who, in this article, explore the effects of pay day loans and their impact on your financial score and credit file.
What is a pay day loan?
A pay day loan is a short-term loan that was designed to ‘tide you over till pay day’. You can borrow from £100-£1000 and the money is paid directly into your bank account which you will then pay back with interest, which can be calculated daily. Pay day loans are usually highly criticised and should be avoided if you can. If you miss your repayment, you may be hit with high interest rates and missed payment charges. This can ultimately cause you to find yourself in more debt. Money experts have advised that you should only take out a payday loan if you can 100% afford to pay it back on time.
What is your credit score?
Your credit report is basically your financial CV. It shows your previous borrowing and repayment history and how good you are at manging your finances. The information on your credit file is used to determine your credit score. Your credit score is a numerical figure which helps lenders to determine whether you should be accepted for any type of finance, loan or credit. The better your credit file, the better your credit score. Your credit score can be lowered by factors such as missed payments, defaults, county court judgements and bankruptcy. Your credit score isn’t permanent and there are many things you can do to rebuild your credit score. Many people are wary of pay day loans and their effect on your credit score.
How do pay day loans impact your credit score?
If you take out a pay day loan and pay it back in full and on time, it won’t harm your credit score. This could even be used as a positive as it provides evidence to lenders that you are able to effectively manage a pay day loan. Pay day loans will be recorded on your credit file and will be visible to any companies who check your credit file. Some lenders may see payday loans on your credit score as a negative as they believe pay day loan users are less reliable. Pay day loans can negatively affect your credit score and not just when you miss your repayment. Your score could even be negatively impacted even when you apply for a payday loan and also if you apply to borrow more money. Missed payments can drag your credit score down as it indicates to potential lenders that you aren’t good at managing your money and can affect your chances of being approved in the future.
How can I improve my credit score?
If you have bad credit from missed pay day loan payments, you may think your score is damaged forever but this isn’t the case. Just like anything that needs building, it doesn’t happen overnight. However, depending on the quality of your credit score there are a few ways in which you can easily improve your credit score.
- Register on the electoral roll. This is one of the easiest ways to increase your credit score. The electoral roll confirms to lenders that you are who you say you are and verifies your address and how long you have lived there.
- Don’t miss any payments. If you have previously had trouble making repayments, you should try to not miss any payments in the run up to any sort of finance or loan application. Setting up payment reminders or direct debits can help make sure all your bills go out on time each month.
- Check your credit file. You’d be surprised how many people have incorrect information on their credit file which can lower your overall score. Check your credit file for free online and look for any mistakes, fraudulent activity or any financial partners that you are no longer linked to.
- Consider a credit building credit card. You may have a low credit score because you don’t have any credit yet. A credit building card is a great way to show you can manage your money effectively. Even making a few small purchases a month and paying them off in full when payment is due can increase your score.
About the author: Refused Car Finance is a car finance provider based in the North East of England. They specialise in helping people gain car finance with bad credit and also provide many thought leadership pieces on all things related to personal finance and motoring.